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Spirit AeroSystems Holdings, Inc. (SPR), Fluor Corporation (NEW) (FLR), McDermott International (MDR): Bad Contracts Can Sometimes Make You Good Money

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Companies that build big, complex projects often do so on long-term contracts. If they fail to anticipate costs or control expenses in the course of those contracts, they often pay dearly. Current stockholders may suffer whenever these companies eat losses on contracts gone bad, but one costly contract doesn’t make a company a lousy investment. The following three companies are all facing major contract troubles right now, and this could provide you with a profitable buying opportunity.

An aircraft-parts maker not making much profit
Spirit AeroSystems Holdings, Inc. (NYSE:SPRmanufactures and designs critical aircraft components. Most of its work is done for major manufacturers such as The Boeing Company (NYSE:BA), which accounts for about 84% of Spirit’s sales. Though the company has plenty of business, with revenue up 13% to $1.5 billion in the latest quarter, its profitability has been less assured.

Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) produced an operating loss of $239 million in the recent second quarter, compared to operating income of $83 million in the prior year. The large deficit resulted from pre-tax charges of approximately $448 million from five different contract programs that exceeded budgeted expectations. Disturbingly, this large write-off comes shortly after a larger $590 million in contract losses was announced in late 2012.

Given the size and frequency of such write-offs, investors have lost faith in the company’s ability to make meaningful money. Spirit’s reliance on future work it will do for The Boeing Company (NYSE:BA)’s new 787 aircraft only makes things more uncertain. Its losses on past contracts make it harder to have much confidence in Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’s assumption of the 787 project’s profitability.

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) does have some positives going for it, however. It has plenty of work lined up, with a backlog of approximately $38 billion in orders. About 85% of its recent $448 million quarterly charge was pre-emptive as well, relating to future years. With all that future bad news already baked into its share price, Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’s shares might have room to rebound if the company can get back to consistent operating profitability.

The engineering giant that buckled against a wind
Fluor Corporation (NEW) (NYSE:FLR)
, a highly respected engineering and construction company, shows that even those at the top are not immune from contract problems. The company posted a fourth-quarter 2012 loss of $4 million, thanks to a $265 million after-tax charge related to an adverse judgement on its Greater Gabbard wind farm project. Fluor was thus unable to recoup extra costs arising from project delays and productivity issues at the $1.8 billion job.

Though this write-off was substantial, it has not seemed to hinder Fluor Corporation (NEW) (NYSE:FLR)’s current operations. In the latest quarter, the company reported earnings of $161 million, flat year over year. Revenue came in at $7.2 billion, comparable with the company’s results in 2012. Increased work in the company’s oil and gas division and additional assignments in the power segment thanks to utilities changing over to natural gas helped offset weaker results in government and mining businesses.

Fluor Corporation (NEW) (NYSE:FLR)’s shares have rebounded nicely from 2012’s troubles and look fairly priced. Reasonable business value seems around $62 a share at a 12 times multiple of operating cash flow, slightly lower than its 2010-2011 multiple average of 13 times.

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